FIN202 – FINANCIAL MANAGEMENT

Sample MCQ – SEMESTER 2, 2019

1) Which of the following statements best represents what finance is about?

A) How political, social, and economic forces affect corporations
B) Maximizing profits
C) The study of how people and businesses make investment decisions and how to
finance those decisions.
D) Reducing risk
Answer: C
2) The area of finance that deals with long-term investment decisions is known as
A) capital structure.
B) working capital management.
C) financial strategy.
D) capital budgeting.
Answer: D
3) Which of the following is NOT an advantage of the sole proprietorship?
A) Limited liability
B) No time limit imposed on its existence
C) No legal requirements for starting the business
D) None of the above
Answer: A
4) The true owners of the corporation are the
A) holders of debt issues of the firm.
B) preferred stockholders.
C) board of directors of the firm.
D) common stockholders.
Answer: D

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5) A corporation is owned by
A) shareholders and partners.
B) the shareholders who hold the company's stock.
C) the Board of Directors
D) its Chief Executive Officer.
Answer: B
6) Which of the following best describes the goal of the firm?
A) The maximization of the total market value of the firm's common stock
B) Profit maximization
C) Risk minimization
D) None of the above
Answer: A
7) Profit maximization does not adequately describe the goal of the firm because
A) profit maximization does not require the consideration of risk.
B) profit maximization ignores the timing of a project's return.
C) maximization of dividend payout ratio is a better description of the goal of the firm.
D) A and B.
Answer: D
8) Which of the following goals of the firm is equivalent to the maximization of shareholder
wealth?
A) Profit maximization
B) Risk minimization
C) Maximization of the total market value of the firm's common stock
D) None of the above
Answer: C
9) If managers are making decisions to maximize shareholder wealth, then they are
primarily concerned with making decisions that should

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 A) positively affect profits.
B) increase the market value of the firm's common stock.
C) either increase or have no effect on the value of the firm's common stock.
D) accomplish all of the above.
Answer: B
10) Profit maximization is not an adequate goal of the firm when making financial
decisions because A) it does not necessarily reflect shareholder wealth maximization.
B) it ignores the risk inherent in different projects that will generate the profits.
C) it ignores the timing of a project's returns.
D) all of the above are correct.
Answer: D
11) Managers of corporations need to act in an ethical manner
A) because ethics violations will be punished by the law.
B) because a business must be trusted by investors, customer and the public if it is to
succeed.
C) because business managers must answer to a higher authority.
D) because ethical behavior is its own justification.
Answer: B
12) What does the agency problem refer to?
A) The conflict that exists between the board of directors and the employees of the firm.
B) The problem associated with financial managers and Internal Revenue agents.
C) The conflict that exists between stockbrokers and investors.
D) The problem that results from potential conflicts of interest between the manager of a
business and the stockholders.
Answer: D
13) In regard to the agency problem, ________ are the principal owners of a
corporation.
A) shareholders
B) managers
C) employees

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D) suppliers
Answer: A
14) In finance, we assume that investors are generally
A) neutral to risk.
B) averse to risk.
C) fond of risk.
D) none of the above.
Answer: B
15) Which of the following should be considered when assessing the financial impact
of business decisions?
A) The amount of projected earnings
B) The risk-return tradeoff
C) The timing of projected earnings; i.e., when they are expected to occur
D) All of the above
Answer: D
16) Which of the following is most likely to motivate executives to maximize
shareholder wealth?
A) Tying bonuses to cost reductions and meeting budget goals.
B) Offering them relatively high salaries.
C) Tying annual bonuses to increases in annual profits.
D) Compensating them with stock options that can only be exercised after five years.
Answer: D
17) If one security has a greater risk than another security, how will investors respond?
A) They will require a lower rate of return for the investment that has greater risk.
B) They would be indifferent regarding their expectation of rates of return for either
investment.
C) They will require a higher rate of return for the investment that has greater risk.
D) None of the above.
Answer: C

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 18) If an investor had a choice of receiving $1,000 today, or $1,000 in five years,
which would the average investor prefer?
A) $1,000 in five years because they are not good at saving money.
B) $1,000 today because it will be worth more than $1,000 received in five years.
C) $1,000 in five years because it will be worth more than $1,000 received today.
D) Investors would be indifferent to when they would receive the $1,000.
E) None of the above.
Answer: B
19) Why do investors prefer receiving cash sooner rather than later, according to
finance theory?
A) Incremental profits are greater than accounting profits.
B) Money received earlier can be reinvested and returns can be increased.
C) Tax considerations are important when investing.
D) Diversification leads to increased value.
Answer: B
20) Foregoing the earning potential of a dollar today is referred to as the
A) time value of money.
B) opportunity cost concept.
C) risk/return tradeoff.
D) creation of wealth.
Answer: B
21) In measuring value, the focus should be on
A) cash flow.
B) accounting profits.
C) time value of money.
D) earnings per share.
Answer: A
22) The principal savers in the financial markets are
A) businesses.

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B) banks.
C) individuals.
D) governments.
Answer: C

23) The principal participants in in the financial markets are

A) businesses, banks, government.
B) borrowers, savers, financial institutions.
C) mutual finds, hedge funds, investment bankers.
D) dealers, brokers, regulators.
Answer: B

24) Firms that wish to raise funds for investment purposes issue securities in the
A) primary and secondary markets.
B) primary markets.
C) secondary markets.
D) intermediary markets.
Answer: B
25) Secondary markets
A) function as a place for smaller, less well-known firms to issue securities.
B) are an important vehicle for established firms to raise additional money for expansion.
C) are a means by which funds are cycled from savers to borrowers.
D) are concerned with the trading of previously issued securities between investors.
Answer: D
26) All of the following operate as financial intermediaries EXCEPT
A) commercial banks.
B) mutual funds.
C) insurance companies.

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 D) the U. S. Treasury
Answer: D
27) All of the following are true about insurance companies EXCEPT
A) They invest their reserves.
B) They may guarantee to reimburse lenders should lenders' loans go into default.
C) They participate in equipment leasing.

D) They may only invest their reserves in interest paying bank accounts under Federal
law.
Answer: D
28) Insurance companies have a great deal of money to invest because
A) their profit margins are so high.
B) because they are reluctant to cover insurable losses.
C) because they must hold large reserves to pay potential claims.
D) insurance do not actually have large sums to invest.
Answer: C
29) Which of the following financial instruments entails the most risk and potentially
the highest returns for investors?
A) debt with a maturity of less than one year
B) bonds
C) common stock
D) preferred stock
Answer: C
30) Financial managers use the time value of money to
A) make business decisions.
B) compare cash flows of different projects.
C) determine the price of common stock.
D) both A and B.
E) all of the above.

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 Answer: D
31) The time value of money is created by
A) the existence of profitable investment alternatives and interest rates.
B) the fact that the passing of time increases the value of money.
C) the elimination of the opportunity cost as a consideration.
D) the fact that the value of saving money for tomorrow could be more or less than
spending it today.
Answer: A
32) Which of the following statements is FALSE?

A) A dollar received one year from now will be worth more than a dollar received today.

B) A dollar received one year from now will be worth more than a dollar received two years
from now.

C) Compounding essentially means earning interest on interest on an initial balance.

D) Perpetuities pay an equal payment forever.

Answer: A

33) An investor will invest $1,000 now and expect to receive $10 for each of the next 10 years plus
$1,000 at the end of the 10th year. Her cash flow at time period 0 is

A) $1,000.

B) -$1,000.

C) $-990.

D) $1,010.

Answer: B

34) Should you prefer to receive $100,000 right now or $10,000 at the end of each of the next 12
years?

A) $100,000 now.

B) $10,000 at the end of each of the next 12 years.

C) The answer depends on the time value of money.

D) Either alternative is equally valuable.

Answer: C

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35) Money has a greater time value time value

A) when rates of return are higher.

B) when rates of return are lower.

C) when the future is uncertain.

D) when investors are willing to assume greater risks.

Answer: A

36) At what rate must $400 be compounded annually for it to grow to $716.40 in 10 years?

A) 6%

B) 5%

C) 7%

D) 8%

Answer: A

37) An increase in future value can be caused by

A) an increase in the: annual interest rate.

B) an increase in the: number of compounding periods.

C) deferring the original investment by one or more periods.

D) both A and B.

Answer: D

38) You just purchased a parcel of land for $10,000. If you expect a 12% annual rate of return on
your investment, how much will you sell the land for in 10 years?

A) $25,000

B) $31,060

C) $38,720

D) $34,310

Answer: B

39) If you put $700 in a savings account with a 10% nominal rate of interest compounded monthly,
what will the investment be worth in 21 months (round to the nearest dollar)?

A) $827

B) $833

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 C) $828

D) $1,176

Answer: B

40) What is the value of $750 invested at 7.5% compounded quarterly for 4.5 years (round to
the nearest $1)?
A) $1,048
B) $1,010
C) $1,038
D) $808
Answer: A
41) Dawn Swift discovered that 20 years ago, the average tuition for one year at an Ivy
League school was $15,000. Today, the average cost is $60,000. What is the growth rate in
tuition cost over this 20-year period?
A) 15.5%
B) 4.2%
C) 7.18%
D) 10.6%
Answer: C
42) How many periods would it take for the deposit to grow to $6,798 if the interest is
compounded semiannually?
A) 17
B) 19
C) 21
D) 25
Answer: C
43) You deposit $5,000 today in an account drawing 12% compounded quarterly. How much
will you have in the account at the end of 2 1/2 years?
A) $7,401
B) $5,523
C) $7,128

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 D) $6,720
Answer: D

44) The future value of a single sum

A) increases as the compound rate decreases.

B) decreases as the compound rate increases.

C) increases as the number of compound periods decreases.

D) increases as the compound rate increases.

Answer: D

45) Assuming two investments have equal lives, a high discount rate tends to favor
A) the investment with large cash flow early.
B) the investment with large cash flow late.
C) the investment with even cash flow.
D) neither investment since they have equal lives.
Answer: A
46) What is the present value of $1,000 to be received 10 years from today? Assume that the
investment pays 8.5% and it is compounded monthly (round to the nearest $1).
A) $893
B) $3,106
C) $429
D) $833
Answer: C
47) What is the present value of $12,500 to be received 10 years from today? Assume a
discount rate of 8% compounded annually and round to the nearest $1.00.
A) $5,790
B) $11,574
C) $9,210
D) $17,010

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 Answer: A
48) All else constant, the present value of an investment will increase if
A) the investment is discounted at a higher interest rate.
B) the investment is discounted for fewer years.
C) the investment is discounted at a lower interest rate.
D) both B & C.
Answer: D
49) The present value of $1,000 to be received at the end of five years, if the discount rate is
10%, is
A) $621.
B) $784.
C) $614.
D) $500.
Answer: A
50) What is the present value of an investment that pays $400 at the end of three years and
$700 at the end of 10 years if the discount rate is 5%?
A) $1,100.00
B) $675.30
C) $775.40
D) $424.60
Answer: C
51) If you want to have $1,700 in seven years, how much money must you put in a savings account
today? Assume that the savings account pays 6% and it is compounded quarterly (round to the
nearest $10).

A) $1,120

B) $1,130

C) $1,110

D) $1,140

Answer: A

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52) If you have $20,000 in an account earning 8% annually, what constant amount could you
withdraw each year and have nothing remaining at the end of five years?

A) $3,525.62

B) $5,008.76

C) $3,408.88

D) $2,465.78

Answer: B

53) A commercial bank will loan you $17,500 for two years to buy a car. The loan must be
repaid in 24 equal monthly payments. The annual interest rate on the loan is 6% of the
unpaid balance. What is the amount of the monthly payments?
A) $1,394.98
B) $688.11
C) $3779.39
D) $775.61
Answer: D
54) Your company has received a $50,000 loan from an industrial finance company. The
annual payments are $6,202.70. If the company is paying 9% interest per year, how many
loan payments must the company make?
A) 15
B) 13
C) 12
D) 19
Answer: A
55) Gina Dare, who wants to be a millionaire, plans to retire at the end of 40 years. Gina's plan is
to invest her money by depositing into an IRA at the end of every year. What is the amount that
she needs to deposit annually in order to accumulate $1,000,000? Assume that the account will
earn an annual rate of 11.5%. Round off to the nearest $1.

A) $1,497

B) $5,281

C) $75

D) $3,622

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 Answer: A

56) Francis Peabody just won the $89,000,000 California State Lottery. The lottery offers
the winner a choice of receiving the winnings in a lump sum or in 26 equal annual
installments to be made at the beginning of each year. Assume that funds would be invested
at 7.65%. Francis is trying to decide whether to take the lump sum or the annual
installments. What is the amount of the lump sum that would be exactly equal to the present
value of the annual installments? Round off to the nearest $1.
A) $89,000,000
B) $38,163,612
C) $13,092,576
D) $41,083,128
Answer: D

57) As the number of monthly payments on a loan increases, the size of each payment ________
and the total interest paid over the life of the loan ________.

A) increases, decreases

B) decreases, stays the same

C) stays the same, decreases

D) decreases, increases

Answer: D

58) What is the present value of $250 received at the beginning of each year for 21 years? Assume
that the first payment is received today. Use a discount rate of 12%, and round your answer to
the nearest $10.

A) $1,870

B) $2,090

C) $2,117

D) $3,243

Answer: C

59) What is the present value of $300 received at the beginning of each year for five years?
Assume that the first payment is not received until the beginning of the third year (thus
the last payment is received at the beginning of the seventh year). Use a 10% discount rate,
and round your answer to the nearest $1.00.

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 A) $1,137
B) $854
C) $940
D) $1,257
Answer: C
60) A retirement plan guarantees to pay you or your estate a fixed amount for 20 years. At
the time of retirement, you will have $31,360 to your credit in the plan. The plan anticipates
earning 8% interest annually over the period you receive benefits. How much will your
annual benefits be, assuming the first payment occurs one year from your retirement date?
A) $682
B) $6,272
C) $2,000
D) $3,194
Answer: D
61) George and Laura will be retiring in four years and would like to buy a lake house. They
estimate that they will need $550,000 at the end of four years to buy this house. They
want to make four equal annual payments into an account at the end of each year. If they can
earn 8% on their money, compounded annually, over the next four years, how much must
they invest at the end of each year for the next four years to have accumulated $550,000 by
retirement?
A) $137,500
B) $122,056
C) $113,015
D) $131,821
Answer: B
62) Harold Hawkins bought a home for $320,000. He made a down payment of $45,000; the
balance will be paid off over 30 years at a 6.775% rate of interest. How much will
Harold's monthly payments be? Round off to the nearest $1.
A) $1,450
B) $1,788
C) $3,200
D) $1,682

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 Answer: B
63) You have borrowed $70,000 to buy a sports car. You plan to make monthly payments over a 15-
year period. The bank has offered you a 9% interest rate compounded monthly. Calculate the
total amount of interest dollars you will pay the bank over the life of the loan. Round to the
nearest dollar and assume end-of-month payments.

A) $47,451

B) $51,644

C) $54,776

D) $57,798

Answer: D

64) Recently you borrowed money for a new car. The loan amount is $15,000 to be paid back in
equal annual payments which begin today, and will continue to be payable at the beginning of
each year for a total of five years. Interest on the loan is 8%. What is the amount of the loan
payment?

A) $3,756.85

B) $4,200.00

C) $3,478.31

D) $3,000.00

Answer: C

65) Which of the following statements is true?

A) The future value of an annuity would be greater if funds are invested at the beginning
of each period instead of at the end of each period.
B) An annuity is a series of equal payments that are made, or received, forever.
C) The effective annual rate (APR) of a loan is higher the less frequently payments are
made.
D) The future value of an annuity would be greater if funds are invested at the end of
each period rather than at the beginning of each period.
Answer: A
66) The issuance of bonds to raise capital for a corporation
A) magnifies the returns to the stockholders.
B) increases risk to the stockholders.
C) is a cheaper form of capital than the issuance of common stock.

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 D) all of the above.
Answer: D
67) A(n) ________ is used to outline the issuing company's contractual obligations to bondholders.

A) mortgage

B) debenture

C) bond rating

D) indenture

Answer: D

68) The yield to maturity on a bond

A) is fixed in the indenture.
B) is lower for higher-risk bonds.
C) is the required return on the bond.
D) is generally equal to the coupon interest rate.
Answer: C
69) All of the following affect the value of a bond EXCEPT
A) investors' required rate of return.
B) the recorded value of the firm's assets.
C) the coupon rate of interest.
D) the maturity date of the bond.
Answer: B
70) A $1,000 par value 10-year bond with a 10% coupon rate recently sold for $900. The yield
to maturity
A) is 10%.
B) is greater than 10%.
C) is less than 10%.
D) cannot be determined.
Answer: B

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 71) Colby & Company bonds pay semiannual interest of $50. They mature in 15 years and have
a par value of $1,000. The market rate of interest is 8%. The market value of Colby
bonds is (round to the nearest dollar)
A) $1,173.
B) $743.
C) $1,000.
D) $827.
Answer: A

72) Caldwell, Inc. sold an issue of 30-year, $1,000 par value bonds to the public. The bonds
carry a 10.85% coupon rate and pay interest semiannually. It is now 12 years later. The current
market rate of interest on the Caldwell bonds is 8.45%. What is the current market price
(intrinsic value) of the bonds? Round off to the nearest $1.
A) $751
B) $1,177
C) $1,220
D) $976
Answer: C
73) MI has a $1,000 par value, 30-year bond outstanding that was issued 20 years ago at an
annual coupon rate of 10%, paid semiannually. Market interest rates on similar bonds are 7%.
Calculate the bond's price.
A) $956.42
B) $1,000.00
C) $1,168.31
D) $1,213.19
Answer: D
74) What is the yield to maturity of a nine-year bond that pays a coupon rate of 20% per year,
has a $1,000 par value, and is currently priced at $1,407? Assume annual coupon
payments.
A) 21.81%
B) 6.14%

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 C) 12.28%
D) 11.43%
Answer: C
75) What is the expected rate of return on a bond that matures in seven years, has a par value
of $1,000, a coupon rate of 14%, and is currently selling for $911? Assume annual
coupon payments.
A) 7.81%
B) 15.36%
C) 15.61%
D) 16.22%
Answer: D
76) What is the expected rate of return on a bond that pays a coupon rate of 9% paid
semiannually, has a par value of $1,000, matures in five years, and is currently selling for
$1071?
A) 7.28%
B) 8.40%
C) 3.64%
D) 4.21%
Answer: A
77) As interest rates, and consequently investors' required rates of return, change over time,
the ________ of outstanding bonds will also change.
A) maturity date
B) coupon interest payment
C) par value
D) price
Answer: D
78) A bond that is held to maturity
A) will necessarily have a yield to maturity equal to the coupon rate.
B) will necessarily earn the yield to maturity at the time of purchase.

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 C) may earn more or less that its yield to maturity at the time of purchase because the rate
at which coupons can be reinvested may change.
D) will earn the yield to maturity at the date of maturity.
Answer: C
79) You are considering the purchase of Hytec bonds that were issued 14 years ago. When
the bonds were originally sold, they had a 30-year maturity and a 14.375% coupon
interest rate that is payable semiannually. The bond is currently selling for $1,508.72.
What is the yield to maturity on the bonds?
A) 8.50%
B) 14.38%
C) 11.11%
D) 7.67%
Answer: A
80) Marshall Manufacturing has a bond outstanding that was issued 20 years ago at a coupon
rate of 9%. The $1,000 par value bond pays interest semiannually and was originally
issued with a term of 30 years. If today's interest rate is 14%, what is the value of the
bond today?
A) $654.98
B) $735.15
C) $814.42
D) $941.87
Answer: B
81) The expected yield of a bond will be less than its yield to maturity when
A) market interest rates are expected to rise.
B) market interest rates are expected to fall.
C) the expected yield of a bond cannot be lower than its yield to maturity.
D) when the bond is purchased at a discount.
Answer: B
82) When a bond's coupon rate is higher than the required rate of return, the bond
A) will sell at a discount from par.
B) will sell at a premium over par

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 C) may sell at either a discount or a premium.
D) will sell at par value.
Answer: B
83) P. Noel Company's common stock has just paid a $2.00 dividend. If investors believe
that the expected rate of return on P. Noel is 14% and that dividends will grow at the rate
of 5% per year for the foreseeable future, what is the value of a share of P. Noel stock?
A) $15.00
B) $22.22
C) $23.33
D) $40.00
Answer: C
84) Green Company's common stock is currently selling at $24.00 per share. The company
recently paid dividends of $1.92 per share and projects growth at a rate of 4%. At this
rate, what is the stock's expected rate of return?
A) 4.08%
B) 8.00%
C) 12.00%
D) 8.80%
Answer: C
85) Butler, Inc.'s return on equity is 17% and management retains 75% of earnings for
investment purposes. Based on this information, what will be the firm's growth rate?
A) 4.25%
B) 22.67%
C) 44.12%
D) 12.75%
Answer: D
86) You are evaluating the purchase of Cellars, Inc. common stock that just paid a dividend
of $1.80. You expect the dividend to grow at a rate of 12% for the next three years. You
plan to hold the stock for three years and then sell it. You estimate that a required rate of
return of 17.5% will be adequate compensation for this investment. Calculate the present
value of the expected dividends.

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 A) $4.91
B) $5.40
C) $9.80
D) $6.80
Answer: A
87) You are evaluating the purchase of Charbridge, Inc. common stock which currently pays
no dividend and is not expected to do so for many years. Because of rapidly growing
sales and profits, you believe the stock will be worth $51.50 in 3 years. If your required
rate of return is 16%, what is the stock worth today?
A) $59.74
B) $51.25
C) $32.99
D) $0.00 because stocks that do not pay dividends have no value.
Answer: C
88) Frost Corporation's recent earnings per share were $12.90. Their dividend payout ratio is 20%.
Earnings are expected to grow at an average of 6% per year and the company's policy is to
maintain the same payout ratio. If investors are requiring a 12% rate of return on this stock,
what will they be willing to pay for one share?

A) $21.50

B) $22.75

C) $43.00

D) $45.58

Answer: D

89) Fris B. Corporation stock is currently selling for $42.86. It is expected to pay a dividend of $3.00
at the end of the year. Dividends are expected to grow at a constant rate of 3% indefinitely.
Compute the required rate of return on FBC stock.

A) 10%

B) 33%

C) 7%

D) 4.3%

Answer: A

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90) A stock currently sells for $63 per share, and the required return on the stock is 10%. Assuming a
growth rate of 5%, calculate the stock's last dividend paid.

A) $1

B) $3

C) $5

D) $7

Answer: B

91) A decrease in the ________ will cause an increase in common stock value.

A) growth rate

B) required rate of return

C) last paid dividend

D) both B and C

Answer: B

92) KDP's most recent dividend was $2.00 per share and is selling today in the market for
$70. The dividend is expected to grow at a rate of 7% per year for the foreseeable future.
If the market return is 10% on investments with comparable risk, should you purchase the
stock?
A) No, because the stock is overpriced $1.33.
B) No, because the stock is overpriced $3.33.
C) Yes, because the stock is underpriced $1.33.
D) Yes, because the stock is underpriced $3.33.
Answer: C
93) If a company has issued preferred stock
A) the common shareholders will have weaker voting rights.
B) preferred shareholders will be allowed to choose one or more members of the board of
directors.
C) dividends on preferred stock will be higher than the common dividends.
D) preferred dividends will have to be paid before the company can pay dividends on
common stock.
Answer: D
94) Common stockholders expect greater returns than bondholders because
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 A) they have no legal right to receive dividends.
B) they bear greater risk.
C) in the event of liquidation, they are only entitled to receive any cash that is left after
all creditors are paid.
D) all of the above.
Answer: D
95) WSU Inc. is a young company that does not yet pay a dividend. You believe that the
company will begin to pay dividends 5 years from now, and that the company will then
be worth $50 per share. If your required rate of return on this risky stock is 20%, what is
the stock worth today?
A) $40
B) $10
C) $20.09
D) $0.00
Answer: C
96) Green Corp.'s preferred stock is selling for $20.83. If the company pays $2.50 annual
dividends, what is the expected rate of return on its stock?
A) 8.33%
B) 12.00%
C) 2.50%
D) 20.00%
Answer: B
97) Sacramento Light & Power issued preferred stock in 1998 that had a par value of $85. The
preferred stock pays a dividend of 5.75%. Investors require a rate of return of 6.50% today on
this stock. What is the value of the preferred stock today? Round to the nearest $1.

A) $100

B) $85

C) $75

D) $16

Answer: C

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98) Which of the following statements is true?
A) Preferred stockholders are entitled to dividends before common stockholders can
receive dividends.
B) Preferred stock, like common stock, usually has no maturity; i.e., the corporation does
not pay back the investment.
C) The market value of preferred stock, like bonds, will usually fluctuate in value
primarily as the result of market rates of interest.
D) All of the above.
Answer: D
99) World Wide Interlink Corp. has decided to undertake a large project. Consequently, there is a
need for additional funds. The financial manager plans to issue preferred stock with an annual
dividend of $5 per share. The stock will have a par value of $30. If investors' required rate of
return on this investment is currently 20%, what should the preferred stock's market value be?
A) $10

B) $15

C) $20

D) $25

Answer: D

100) Davis Gas & Electric issued preferred stock in 1985 that had a par value of $50. The stock pays a
dividend of 7.875%. Assume that shares are currently selling for $62.50. What is the preferred
stockholder's expected rate of return? Round to the nearest 0.01%.

A) 6.30%

B) 7.88%

C) 10.25%

D) 5.02%

Answer: A

101) If there is a 20% chance we will get a 16% return, a 30% chance of getting a 14% return,
a 40% chance of getting a 12% return, and a 10% chance of getting an 8% return, what is
the expected rate of return?
A) 12%
B) 13%
C) 14%

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 D) 15%
Answer: B
102) You are considering investing in a firm that has the following possible outcomes:
Economic boom: probability of 25%; return of 25%
Economic growth: probability of 60%; return of 15%
Economic decline: probability of 15%; return of -5%
What is the expected rate of return on the investment?
A) 15.0%
B) 11.7%
C) 14.5%
D) 25.0%
Answer: C

103) You are considering investing in a firm that has the following possible outcomes:
Economic boom: probability of 25%; return of 25%
Economic growth: probability of 60%; return of 15%
Economic decline: probability of 15%; return of -5%
What is the standard deviation of returns on the investment?
A) 84.75%
B) 15.28%
C) 12.47%
D) 9.21
Answer: D
104) Which of the following best measures an asset's risk?
A) Expected return
B) The standard deviation
C) The probability distribution
D) The cash return

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 Answer: B
105) Your portfolio consists of $3,000 in ABC stock, $4,500 of DEF stock and $2,500 of GHI
stock. Expected rates of return are ABC 5%, DEF 12%, and GHI 16%.
What is the portfolio expected rate of return?
A) 10.9%
B) 12.0%
C) 11.4%
D) 16.0%
Answer: A
106) The expected return on VZ next year is 12% with a standard deviation of 20%. The
expected return on ANT next year is 24% with a standard deviation of 30%.
The correlation between the two stocks is .6. If Emily makes equal investments in VZ
and ANT, what is the standard deviation of her portfolio?
A) 22.47%
B) 25.00%
C) 5.05%
D) 15.00%
Answer: A
107) A negative coefficient of correlation implies that
A) on average, returns to such assets are negative.
B) asset returns tend to move in opposite directions.
C) asset return tend to move in opposite directions.
D) None of the above because the coefficient of correlation cannot be negative.
Answer: B
108) The capital asset pricing model
A) provides a risk-return trade-off in which risk is measured in terms of the market
returns.
B) provides a risk-return trade-off in which risk is measured in terms of beta.
C) measures risk as the correlation coefficient between a security and market rates of
return.

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 D) depicts the total risk of a security.
Answer: B
109) You are considering investing in Ford Motor Company. Which of the following is an
example of diversifiable risk?
A) Risk resulting from the possibility of a stock market crash
B) Risk resulting from uncertainty regarding a possible strike against Ford
C) Risk resulting from an expected recession
D) Risk resulting from interest rates decreasing
Answer: B
110) A stock's beta is a measure of its
A) systematic risk.
B) unsystematic risk.
C) company-specific risk.
D) diversifiable risk.
Answer: A
111) If you hold a portfolio made up of the following stocks:
Investment Value Beta
Stock A $2,000 1.5
Stock B $5,000 1.2
Stock C $3,000 .8
What is the beta of the portfolio?
A) 1.17
B) 1.14
C) 1.32
D) Can't be determined from information given
Answer: B
112) Changes in the general economy, such as changes in interest rates or tax laws, represent
what type of risk?
A) Firm-specific risk

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 B) Market risk
C) Unsystematic risk
D) Diversifiable risk
Answer: B
113) A stock with a beta greater than 1.0 has returns that are ________ volatile than the
market, and a stock with a beta of less than 1.0 exhibits returns which are ________
volatile than those of the market portfolio.
A) more, more
B) more, less
C) less, more
D) less, less
Answer: B

114) You are thinking of adding one of two investments to an already well diversified
portfolio.
Security A Security B
Expected return = 12% Expected return = 12%
Standard deviation of returns = 20.9% Standard deviation of returns = 10.1%
Beta = .8 Beta = 2
If you are a risk-averse investor
A) security A is the better choice.
B) security B is the better choice.
C) either security would be acceptable.
D) cannot be determined with information given.
Answer: A
115) Which of the following is NOT an example of systematic risk?
A) Inflation
B) Recession
C) Management risk

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 D) Interest rate risk
Answer: C
116) Which of the following statements is true?
A) A stock with a beta less than zero has no exposure to systematic risk.
B) A stock with a beta greater than 1.0 has lower nondiversifiable risk than a stock with a
beta of 1.0.
C) A stock with a beta less than 1.0 has lower nondiversifiable risk than a stock with a
beta of 1.0.
D) A stock with a beta less than 1.0 has higher nondiversifiable risk than a stock with a
beta of 1.0.
Answer: C
117) Which of the following statements is true?
A) Systematic, or market, risk can be reduced through diversification.
B) Both systematic and unsystematic risk can be reduced through diversification.
C) Unsystematic, or company, risk can be reduced through diversification.
D) Neither systematic nor unsystematic risk can be reduced through diversification.
Answer: C
118) You are considering a portfolio of three stocks with 30% of your money invested in
company X, 45% of your money invested in company Y, and 25% of your money invested in
company Z. If the betas for each stock are 1.22 for company X, 1.46 for company Y, and 1.03
for company Z, what is the portfolio beta?
A) 1.24
B) 1.00
C) 1.28
D) 1.33
Answer: C
119) Siebling Manufacturing Company's common stock has a beta of .8. If the expected risk-
free return is 2% and the market offers a premium of 8% over the risk-free rate, what is
the expected return on Siebling's common stock?
A) 7.8%
B) 13.4%

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 C) 14.4%
D) 8.4%
Answer: D
120) Tanzlin Manufacturing's common stock has a beta of 1.5. If the expected risk-free return
is 2% and the expected return on the market is 14%, what is the expected return on the
stock?
A) 13.5%
B) 21.0%
C) 16.8%
D) 20.0%
Answer: D

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